The Turkish Lira and Russian Rouble rallied after the Central Bank of Turkey hiked its policy rates a whopping 625bp to 24% on Thursday and the Central Bank of Russia unexpectedly hiked rates 25bp to 7.50%, with other high-yielding emerging market currencies also enjoying an uplift. Along with weak US macro data for August this contributed to a modest drop in the Dollar in trade-weighted terms. The Euro also lost some ground after the European Central Bank revised down its GDP growth forecasts for this year and next.
Sterling enjoyed a decent rally on September 10th as signs emerged that European negotiators are keen to make some progress on a post-Brexit deal with the EU but the British currency has been broadly unchanged since. Similarly the Swiss Franc has been treading water for the past 10 days.
The Australian and Kiwi Dollars, which had been under modest pressure, both posted modest gains.
US Dollar
The Dollar trade-weighted index weakened about 0.4% last week, partly due to the rally in emerging markets currencies including the Turkish Lira, Russian Rouble, South African Rand and Mexican Peso. The Dollar also lost some group to developed currencies with markets disappointed by weaker-than-expected US CPI-inflation, retail sales and manufacturing output data for August. Market pricing for Fed rate hikes is at a cycle high of 45.5bp for 2018 and 48.5bp for 2019 but this has not translated into a stronger Dollar.
Euro
The Euro has been choppy in the past fortnight, oscillating in a narrow range. It was marginally weaker last week but has rebounded in the past 48 hours. Markets are taking some comfort that the European Central Bank is still on track to start cutting its monthly bond purchases in October but the Eurozone also has a number of challenges to deal with, including still modest economic growth, Brexit-related uncertainty, anti-EU sentiment in Italy and Sweden and Viktor Orban’s autocratic government in Hungary.
Sterling
The issue of Brexit is increasingly dominating headlines, with all sides trying to shore up their positions. Prime Minister May is sticking to the post-Brexit deal which she presented two months ago despite firm opposition from both Remainers and Brexiters. The EU seems willing to continue negotiating while also making clear that it cannot agree to a deal which incentivises other member states to leave the EU.
In this context UK macro data are to some extent playing second fiddle. The picture for UK growth remains robust near-term and markets now expect the Bank of England to hikes rates in a year’s time rather than in early 2019. Real weekly earnings growth picked up in July and Visa estimates that real UK consumer spending rose +0.3% mom August and +0.4% yoy, the fastest rate of growth since January. The NIESR last week forecast that GDP growth rose to 0.6% qoq in Q3 from 0.4% qoq in Q2 and the Bank of England also seemed upbeat for the current quarter.
However, there is a far greater uncertainty medium-term. BoE Governor Carney again warned that UK growth would be hit hard should the UK leave the EU without a deal, with UK property prices forecast to fall by 25-35%. The British Chamber of Commerce (BCC) downgraded its 2018 GDP growth forecast from 1.3% to 1.1% due to concerns about the impact of Brexit on investment.
Australia and Kiwi Dollars
Both appreciated about 0.4% last week after having been under modest pressure, with the Australian Dollar benefiting from strong July labour market data.
